Nuclear start-up can take the heat Brett Clegg From: The Australian January 03, 2011 12:00AM Increase Text
JOHN Borshoff watches the bids for Mozambique coal producer Riversdale and Mauritanian iron ore hopeful Sphere Minerals with a wry smile. By rights, Paladin Energy, the uranium producer that the Vietnam veteran founded and remains the driving force behind, should have met the same fate several years ago.
As an emerging producer that took on and developed not one but several mines, Paladin has escaped the consolidation that still looms for smaller independent resource players.
Perhaps the point of greatest vulnerability has passed.
Its key mines in the African states of Namibia and Malawi are beyond the early stages of development, and Borshoff now sits atop a stock with market capitalisation of $3.6 billion.
At least from the vantage of a financial journalist, it would be a shame to lose the character that is Borshoff from listed corporate Australia.
Start of sidebar. Skip to end of sidebar. Related CoveragePaladin uranium play is purely speculative The Australian, 20 Dec 2010 Seeing red on Marathon dig The Australian, 20 Dec 2010 Paladin enters Canada with uranium buy The Australian, 19 Dec 2010 Russian offers $1.6bn for Mantra Resources The Australian, 15 Dec 2010 Uranium mine output next year Adelaide Now, 6 Dec 2010 .End of sidebar. Return to start of sidebar. In a lengthy interview with Strategy Matters just before Christmas, he makes it clear he is not only a visionary but has that indefinable X-factor that marks the truly successful and iconoclastic entrepreneur.
Sometimes testy, often irreverent, always passionate and enthusiastic, Borshoff has pushed the boundaries of adversity in difficult environments -- geographic and professional.
Indeed, he's said to sometimes cajole his board members when they demonstrate a lack of courage -- with a definite streak of black comedy. He's lucky they weren't in 'Nam with him.
"Paladin is a story about belief and commitment in a space that few truly understood and for which there have been few parallels in other commodities," Borshoff says. So in one important sense it is understandable that Paladin is still independent.
Unlike coal or iron ore, uranium comes with a geopolitical complexity all its own.
At times in the past decade, both the mineral and the company have faced industry scepticism about underlying supply-demand fundamentals, while many would-be suitors face the added complications of the politics in which uranium, and the nuclear power it feeds, is enmeshed.
That's not to say there have not been points at which the likes of Cameco and Areva considered having a tilt at Paladin, in which Borshoff owns close to 22 million shares, worth $110 million.
Equally, just in the last month, Russian giant Rosatom paid an enormous $US10.26 a pound of concentrate for Mantra Resources and its flagship Mkuju River Project in southern Tanzania.
So why not Paladin, and why not now?
To answer that requires an understanding of Borshoff's strategy of creating a mining house with projects across four regions and, especially, a diverse customer base.
He argues the Three Mile Island reactor accident in 1979 and Chernobyl in 1986 caused "fundamental damage to the supply industry in terms of loss of expertise, little capital upgrade of operations, weakened attitudes and confidence and an industry shrunk from 15-20 to five main players in order to survive".
In that environment emerged Paladin as a player independent of government-controlled entities such as France's Areva, Russian giant Rosatom-ARMZ and even the previously state-owned but now liberated Canadian producer Cameco.
Crucially, Paladin now stands as the only independent player with not only a diverse pipeline of project developments, but the smarts to bring mines from inception to production, or as Borshoff describes it: "expertise and A to Z capability" from environmental and regulatory approval processes, project management and development planning to global product marketing.
The major mining houses, such as BHP and Rio Tinto, have deliberately underinvested in uranium compared with other commodities, focusing more on replacement resources, while the likes of Xstrata and Vale have no exposure.
Borshoff says the radioactive nature of Paladin's product means that unlike, say, gold you can't simply forget about it once it leaves the mine gate.
The uranium sector is high risk like the airline passenger industry, and other mineral producers are like the trucking industry, he says.
"You have an accident in a truck and it's page 10 of the newspaper, but you have one on an aeroplane, it's page one."
Since 2002, when Paladin acquired the Langer Heinrich project in Namibia, it has invested close to $US450m to take it to nameplate capacity of 7 million pounds.
Coupled with Kayelekera in Malawi, it has up to $US600m in planned expansions across Africa to go to 14 million pound production by 2015.
To put that in context, when Borshoff kicked off Langer Heinrich, the price of uranium was about $US15 a pound. It closed the week ending December 27 at $US62.50 a pound, according to Ux Consulting.
Paladin is arguably the only company with experience building conventional uranium mines and mills in the past 10 years.
Those who contend there will be a supply spike that will cruel prices in coming years don't understand the complexity and challenges in bringing a new mine online, Borshoff contends.
"It hasn't proved to be the case for many years" because of structural issues that people still struggle to understand, he says.
Now, he believes, there is a need for massive investment to ensure supply will be ready and available for the next 100 years as nuclear reactor numbers reach 1000-1200 by 2050.
He says nuclear is a clean energy solution, noting that despite the 1990s slump, by the end of the century 400-440 reactors still provided 15-17 per cent of the world's electricity.
"Renewables like solar and wind had been farting around for decades and still have less than 1 per cent of the market. That just shows you the tremendous bloody horsepower of this technology."
Borshoff isn't standing still.
In early December, Paladin announced expansion into Canada with the purchase of the uranium assets of Fronteer Gold for 52.1 million Paladin shares.
The Fronteer projects, in the highly prospective Newfoundland and Labrador regions of eastern Canada, increase Paladin's total uranium resource base by 36 per cent to 514 million pounds.
In a sense, it was third time lucky for Paladin, which is reckoned to have coveted both Mantra and Namibian neighbour Extract Resources.
The problem was price, as strategic players like the Russians and Chinese were willing to pay exorbitant figures.
ARMZ parent Rosatom Nuclear Energy State Corporation (Rosatom) plans to build nuclear plants across the subcontinent, eastern Europe and countries such as Turkey.
To lock in contracts and supply the plants, it wants control of underlying resources.
Whether it will be able to bring Mantra's Mkuju River Project to fruition remains to be seen. "There's no one there to bloody build the thing," Borshoff says more bluntly. "The Russians can't."
Even ARMZ's purchase of a controlling interest in Canada's Uranium One does not provide the Russians with the production skills of Paladin, as Uranium One's holdings in Kazakhstan are managed through joint ventures by state-owned Kazatomprom.
As for Extract, every time Paladin came close, Borshoff reckons the stock drove too high on takeover speculation, making the deal uneconomic.
Paladin picked up the Fronteer assets at $US1.90 a pound of resource compared with the ARMZ-Mantra deal at $US10.26 a pound. The ostensible reason was that Paladin could offer scrip and Fronteer -- which will end up with close to 6 per cent of Paladin -- could see upside in holding on.
The price paid for Mantra underlines the strategic value of uranium resources.
"There is a tremendous capital imbalance between what is in a nuclear reactor and what is in the mining and so there is enormous dependency," Borshoff says. "I gave a talk once and tried to describe how strategic uranium mines are, and I made everyone visualise an 800-pound gorilla -- that is the high-end nuclear fleet.
"But if you've got a fist around its nuts that gorilla will follow you, and the mining supply side plays that part."
One of the reasons a state-owned vertically integrated player is unlikely to bid for Paladin is its diverse customer base, spread over the Middle East, Russia, France, Germany, Japan, China, South Korea, Taiwan and the US.
Would China be comfortable with the Russians controlling mines they buy from, and vice versa? It's unlikely.
"The idea of one looking down on the highly secretive purchasing agreements of another is not acceptable."
Towards the end of our conversation, Borshoff makes a series of observations about Paladin's independence.
The first is that any bid would need to be done in a "friendly manner to really harness" the intellectual property and depth of experience of Paladin's management.
Considering Paladin's impressive development pipeline -- it holds several promising prospects in Australia awaiting changes in legislation and attitudes -- a more likely development may be acquisition by a diversified mining house such as Xstrata.
In that way, a mining house would be diversifying away from bulk commodities and base metals by adding a ready-made and stand-alone uranium division.
"If you just buy it for its assets, you are really missing out on what the hell Paladin is all about."
A more likely development, Borshoff says, is joint-venture partnerships with tier-one miners, even state-owned players, at project level or for "strategic acquisitions".
Borshoff, 65, is in no hurry to retire. "I'm not here because I want to control, or am grimly hanging on. We're building a whole management group that is working as a team." He feels fresh but won't overstay his welcome, because his board talks openly about the issue of succession and his retirement.
But, he promises, his "grey hair" will be around for another three to five years at least.
PDN Price at posting:
$4.93 Sentiment: None Disclosure: Not Held
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